Asset managers of large manufacturing enterprises, for example, computer manufacturers, electronics manufacturers and auto manufacturers, must determine the inventory levels of components and finished products that are needed to meet target end customer service levels (i.e., the fraction of customer orders that should be received by the requested delivery dates). For such manufacturing enterprises, the delivery of a finished product to an end customer typically involves a complex network of suppliers, fabrication sites, assembly locations, distribution centers and customer locations through which components and products flow. This network may be modeled as a supply chain that includes all significant entities participating in the transformation of raw materials or basic components into the finished products that ultimately are delivered to the end customer.
Business entities use demand forecasting techniques to plan the correct quantity of goods to be manufactured to meet customer needs. If the demand forecast is significantly different from the actual demand, there is an increase in the cost structure of the company. For example, when too much demand is forecasted, too many units will be manufactured, which leaves finished goods in inventory. Growing inventories lead to higher storage and maintenance costs. Business entities that do a better job of forecasting have significantly better control over their inventories and customer service levels.
Mathematical forecasting tools have been developed to increase the accuracy of demand forecasts. Many of these mathematical tools combine historical demand data with statistical analyses to determine a likely predicted value of demand for a product. In general, these forecasting techniques analyze the statistical patterns in historical demand data to predict future demand. Among these demand forecasting methods are: moving average techniques; exponential smoothing techniques; Box-Jenkins techniques; and multivariate regression techniques. Demand forecasting accuracy also is improved by applying human judgment to the predictions of the demand forecasting models. Forecasters validate the forecasts generated by the mathematical models and adjust the forecasts to accommodate events that are not incorporated into these models.